Have you heard the news? We are in a recession and depending on who you are listening to it’s the worse recession since the Great Depression or at least, the recession of the late 70s and early 80s. So what’s it going to be? Cut inventory, labor, deliveries, marketing? This is the conventional response to recessions. Cutting costs is done to provide margin relief – being able to lower price but still turn a profitable margin. In times like these companies experience a significant demand reduction and the principal tool to assuage this resistance is to lower price. At least, that is what most consultants would advise.
Let’s take another look at this situation – one from the perspective of Six Sigma Marketing. At the core of SSM is the idea of value – customer value. This has several implications for recession strategies. First, it is critically important to understand how the targeted product/markets define value. The reason for this is that if you are going to cut costs be sure that the costs are non-value adding costs. Short term margin gains can be won at the expense of longer term strategic losses as the market responds negatively to your declining value proposition. A client of mine was faced with a similar situation. To reduce costs and maintain margins they closed a parts warehouse that was essential in getting much needed parts to coal miners within the prescribed time period. The result was the immediate reduction of costs but the longer term consequence was the loss of business because of a failure to provide the necessary parts when needed. When the economy turns around, and it will, you want to be firmly positioned within your targeted product/markets as the superior value provider. This is the stepping stone to increasing market share. Failure to be the value leader puts you in a catch up positioned trying to prove to the market that you can provide the necessary value to deserve their business.
A second consideration that flows from Six Sigma Marketing and its core reliance on customer value has to do with the value equation itself. Conceptually value is defined as the relationship between the quality of a firm’s products or services and the price that they charge for those products or services. In times of economic stress this value equation undergoes significantly greater scrutiny than it does in times of plenty. Customers are asking very important questions – “Are your products or services worth what they are paying for them? Does the quality that you are providing warrant the price that you are charging?” Companies that do not understand value or do not practice Six Sigma Marketing will be blind to this perspective and automatically turn to price discounting. Reducing prices changes the value equation by making the extant quality less expensive. Price reductions may be in order but Six Sigma Marketing shifts the focus from price to quality. Is your quality sufficient to warrant the prices that you are charging? The short answer to this is to compare your quality and value to that of your key competitors. How does your performance on the key CTQs compare to those of your competitors? If not superior, you may have a value problem and not necessarily a pricing problem. The solution may require adjustments to both quality and price.
Is there anyone in your organization that is paying attention to the value that you are providing the market? If not, why not? An iron law of value is, “If you are not managing your value proposition, your competition is!”
Organizations that do not understand Six Sigma Marketing and value will typically see price resistance and react by lowering their prices. This is not to say that some tinkering with price may be necessary but superior quality tends to support higher prices. Understanding the interaction between quality and price can provide a different approach to weathering the economic downturn. Moreover, making sure that your company’s value propositions are in a superior position makes the turnaround potentially faster and less expensive. Six Sigma Marketing is the guard dog of your organization’s value propositions.